The company is likely to face fines and lawsuits related to the accident, which occurred in September as a result of a rupture in a company-operated pipeline carrying the sticky stuff between a tank and a ship. Matson has other challenges, too: Competition is poised to increase in the Hawaiian shipping market, even as the state's economy has been weakening. Yet the stock (ticker: MATX), at a recent $24.76, trades for 18.4 times this year's expected earnings, a premium of nearly 20% to the Standard & Poor's 500 index, and to other shippers.

Founded in 1882, Matson owns 18 vessels serving Hawaii, Guam, China, and the U.S. mainland. Despite regulatory protections, it could see new competition.
Tim Rue/Bloomberg News

"It's hard to justify a valuation much higher than 10 to 11 times earnings, given the lack of visibility" about cleanup costs and fines, says Norm Caris, a managing director at B. Riley in Los Angeles. Even at a market multiple of 15.5 times 2014 estimates, Matson would fetch 15% less than the current stock price.

Founded in 1882, Matson owns 18 container ships, "roll-on/roll-off" vessels, and barges that travel to and from Guam, Hawaii, the U.S. mainland, and China. The company offers expedited service from China to southern California, and terminal and logistics services. Matson controls about two-thirds of ship-bound trade between Hawaii and the West Coast, due to the Jones Act, a 1920 law that requires ships carrying goods within the U.S. to be U.S.-built, owned, and staffed. The law is aimed at ensuring ample cargo capacity during wartime, but critics say it has reduced competition and unfairly taxes customers.

Matson was spun out of Alexander & Baldwin, its parent for more than 40 years, in 2012. Last year, it generated $196 million in cash flow, enough to cover a 64-cent dividend (the stock yields 2.6%), ensure an investment-grade credit rating, and set aside funds for new ships. Profit margins are nearly 20% higher than for rival
Horizon Lines
(HRZL), which has been hurt by a Puerto Rican unit.

Matson earned $53.7 million, or $1.25 a share, in 2013, on revenue of $1.63 billion, although earnings excluding a litigation-related charge were $1.39 a share, up 14% from the prior year. Earnings are likely to be flat this year, at $1.34 a share, before rising to $1.65 in 2015, propelled by increased container volumes.

Yet these estimates don't reflect possible costs related to the 233,000-gallon molasses spill, which smothered fish and coral in Honolulu harbor. The Hawaii Department of Health and the Environmental Protection Agency are both investigating the accident, and a federal grand jury subpoenaed the company last fall. Analysts haven't yet estimated the cleanup costs, legal expenses, or fines Matson could face, and CEO Matt Cox has declined to comment on them, other than to say the company will pay for the cleanup and has contacted its insurers.

Recent Price

$24.76

12-Month Change

-4.5%

Market Value (bil)

$1.06

2013 EPS

$1.39

2014E EPS

$1.34

2014E P/E

18.4

Dividend Yield

2.6%

E=Estimate Source: Bloomberg

"Insurance would be the favorable option, but since we don't know the size and scope of the problem, it is difficult to tell how meaningful [the hit] will be," says Michael Webber of Wells Fargo, who rates the stock Market Perform.

Based on Barron's analysis, Matson's tab could run from roughly $80 million to nearly $400 million. "There is no Blue Book value for a coral reef," says Robert Richmond, principal investigator at the Kewalo Marine Laboratory at the University of Hawaii.

Coral covers 20% to 80% of many harbors, Richmond says. In previous cases of coral damage, he notes that courts around the world have assessed coral values at between $304 and $1,586 per square meter, based on sale prices, restoration costs, and other factors. Using the midpoint of that range, or $945 per square meter, and assuming coral covers half of Honolulu's 810,000-square-meter harbor, its reef would be valued at $383 million. Using the low point, or $304 per square meter, yields a value of $123 million, not including punitive damages.

The Bottom Line

Matson's shares trade at a premium to the S&P 500, but could sell off as investors begin to discount the possibility that the shipper will be hit by large costs to clean up a spill.

Robert Harris, director of the Sierra Club's Hawaii chapter, cites a "slightly analogous" case in which the U.S. Navy, having grounded a ship on a coral reef near Oahu in 2009, paid Hawaii an $8.5 million settlement and spent $6.5 million to repair between six and 10 acres of damaged reef. A similar valuation, assuming again that coral covers 50% of the 200-acre harbor, would yield a repair cost of $81 million before any fines.

MATSON FACES OTHER headaches, too. Hawaii's economy has been weaker than expected, partly because of a slowdown in Japanese tourism. That is giving some traction to attempts to reform the Jones Act, even if outright repeal is unlikely. Any change in the act that makes it easier to get into the business would threaten Matson's dominance on the mainland. One group pushing for a change is the Hawaii Shippers Council, which represents retailers such as Safeway and Costco, and auto makers. The group proposes that shippers be exempt from the U.S.-build requirement, given the costs.

Even so, privately held Pasha Group plans to introduce a new ship this year that Matson believes could increase capacity by 5% to 10%. Other carriers are considering getting back into the Guam business, sources say.

Cox stresses the health of Matson's business, and says he's upbeat about plans to build a Honolulu light-rail system, which could boost container volumes. He also notes Matson's expedited-service business is growing rapidly. But the good news looks to be fully priced into the shares.